May 10th 2010 Earnings Call

Moderator: Harry Kletter

May 10, 2010

2:00 PM EDT

Operator: Good afternoon my name is (Lynn) and I will be your conference operator today.  At this time, I would like to welcome everyone to the Quarterly Operating Highlights Conference Call.  All lines have been placed on mute to prevent any background noise.  After the speakers' remarks, there will be a question and answer session.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.  If you would like to withdraw your question, press the pound key.

Thank you.  I would now like to turn the call over to Mr. Harry Kletter, Chairman and Chief Executive Officer.  Sir, you may begin your conference.

Harry Kletter: Hello everyone, thanks for getting on the line.  I got few things I want to tell, one, and of course it's good news.  Mainly some of you would like to view our operation if you want, you can go to isa-inc.com, and then hit headquarters and you'll get some good area views of our 50-acre site.

And it's something different than the average operation, and then you may want to ask questions about it in the future or by phone.

Number one, Industrial Services of America's main concept is handling the commodities.  Right now, the main commodity being stainless, very serious ferrous, non-ferrous and we've just recently bought – bringing on a heavy, large alloy operation.

The highlights of course is the wonderful idea of having 15 months of profit included all last year, three months of this year and now we're in to May.  And the talk is very interesting, we've made record-breaking profits all through this period.  As we all know, the difficult times of the last – in 2008 and the last quarter was a difficult period but with us, it was a retrenching.

But what we did do, we geared up and immediately January 1, shifted gears into profits.  And that was mainly done by the acquisition of the operation, assets, and people of the stainless division.  And in 2010 January, we moved into our main operation which comprises a large part of our activity, plus we also brought on our shredder in July.

As you all know, we had a very profitable quarter and I'll have Mr. Don Rodgers give that to you later on.  I'm very pleased with it, as some of you may know me that I've been in the industry quite a while – many years.  But the most important thing is what we did here is to build an organic growth operation.

Each month had been very, very surprising to me and the operation and the people who manage it are very surprising.  We just recently – just returned last weekend from the scrap convention which was in San Diego.  And of course, everybody was in a very good mood because things are picking up, commodities are getting strong, little bit of quiet period for May, but it turned around to be OK.

I think that the most important thing is not for me to give you a lot of discussion this time.  I want to let our President, Brian Donaghy, and then also Don Rodgers to give you the financials.  And then I'll close with a few remarks.  So I'm going to let them go ahead and then come back with some remarks.

I'll first let Brian Donaghy give you his background on the operations.  And one of the things that I want to tell you what I am pleased about – our management.  We have a young group of managers, their ages are in the 30s, they're very aggressive, very good management people, and has surprised me how well in this atmosphere we're in, we can be so extremely positive.

So I'm going to turn it over first to Brian and then Don Rodgers and then I'll come back.

Brian Donaghy: Good afternoon.  As you can see, we continue to benefit from the capital investments and growth initiatives made in the past couple of years.  Our new shredder and alloys operations located at our headquarters in Louisville had a considerable impact on the numbers you will hear from Don later.

We continue to look for ways to make these operations more efficient and more profitable by one or three things.  By attracting and retaining the best names in our industry, by continuously addressing and reviewing operation efficiencies and improving when we can, and by continuously investing in equipment and processes that will add to our bottom line.

Demand for our products remain strong and we have built a location and a management team and created a culture that we feel will deliver growth for years to come.  I will continue to oversee all of the operations as President and COO.

And at this time, I will hand over to Don Rodgers to give you the financial highlights of the first quarter.

Don Rodgers: Thank you Brian, and congratulations Harry and Brian on a record first quarter.  I'll get into it here.  First off, I'd like to read a Safe Harbor statement.  This performance review contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ from predicted results.

Specifically risks include fluctuations in the price of recycled material, earning demand for waste management systems, equipment and services, compared to pressures in the waste management systems and equipment, compared to pressures in the waste management business and loss of customers.

Other information on factors that could affect ISA's results is detailed in ISA's filings with the Securities and Exchange Commission.  ISA undertakes no obligation to publicly release the results of any revisions to the forward-looking statements.

ISA filled a 10-Q this morning, it's out on the website.  Having said that, revenue for the first quarter 2010 increased 206 percent to 74.2 million, this compares to 24.2 million in the quarter one of '09, and 26.1 million in quarter one of '08.  Not only was the revenue up, but volumes also increased.  Ferrous tons increased 214 percent, stainless steel tons increased 82 percent, non-ferrous panels increased 23 percent.

At the end of the year review, we talked about the capital investments.  I briefly want to talk about that again, 2008 and 2009, ISA spent 27 million.  In 2010, we expect to spend 2.3 million.  The spending has positioned the company for significantly more sales with very little if any new capital expenditures.

A revenue increase of 50 million in 2010 versus 2009, we've kind of broken this down between the capital projects, the alloys increased revenue of 34 million, the shredder increase revenue – 8.6, for a combined total of 42.6 which is 85 percent of the total growth.  The original business before the capital projects – the ferrous, non-ferrous – also increased 7.4 million or 30 percent over 2009, 1st quarter.

The ferrous increased 4.4 million, non-ferrous increased 3.9, waste management was down 1.1 million.  Cost to sales – the average rate increased from 83 percent for the first quarter of 2010 to 9 – I'm sorry – from 83 percent in the first quarter 2009 to 91 percent, the cost to sales rate will fluctuate depending on the product mix of metal sold.

Net income increase for the first quarter by 170 percent or $1.8 million, G&A expenses in quarter one 2010 were four percent of revenue compared to 11 percent in quarter one of '09, which is a reduction of seven percent.  The aggregate dollars increased 490,000 and the sum of that, the G&A is up because the company needs to establish the proper infrastructure to support the significant high levels of sales.

We've added people to support higher sales and the shredder, yard workers, admin.  We've also hired people to expand sales in new areas because of high temp alloys that Harry referred to.  Now, the company has leveraged its infrastructure to grow sales even more.

ISA's first quarter 2010 EBITDA approaches the full-year numbers for 2008.  2010, there were 4.1 for the first quarter, 2008 full year was 5 million.  The full year for 2009 was 12.7.

Earnings per share – quarter one 2010 earnings per share were 41 cents per share, compared to 18 cents per share for the first quarter of 2009.  The full year 2008 earnings per share was 43 cents, 2009, $1.34.  The balance sheet working capitals increased 6.2 million, current assets are up 8.9, and the accounts receivable has increased from the end of the year 16 million, and the inventory has decreased 6.4, as ISA's converted the inventory at the end of the year into receivables.

We finalized our banking with BB&T.  We paid off Venture Metals' inventory loan and increased our line of credit.  Having said that, that concludes the financials and I'll turn it back over to Harry to conclude.

Harry Kletter: I think one of the most important things that some of you've heard – we have a split that we've developed and the split will go in effect I think May 17th.  And that will be record date and then the shares will be given out.  Why are we splitting, of course, we'll float.  There is a demand on our stock and we had to do something to do – the first step is to do a split.

More than anything there's – what is this real background of this company.  We have ability to do $600 million in the same facility that I told you of 50 acres.  Six hundred million dollars – you have to have a pretty good infrastructure and it would pay you to look at the picture.  Beyond that, and we can go that way, but we probably want to go into satellite operations.  We're not in the ham-and-egg business, we're really in organic growth.

I'm surprised by some of the things in this operation from the standpoint that I couldn't believe that you could change your whole business in one month.  It all happened January 1, 2009, and that's when we took on this alloy business.  The strangest thing more than anything is we are one of the few alloy stainless operations in the United States with a network.  But more important, we have three very important consumers.

One being an alloy mill, the other a stainless mill, the other one being a steel mill, and the other one being the foundry.  Trucks roll out here all day long.  We've had as high as shipping 2,000 ton in a weekend.  We can ship as much as 25,000 ton of all items.  We are a physical company, we're not a brokerage company.  And we believe that this concept, not only in Louisville but other parts of the country, will maybe be the growth of the future in this business.  And we hope that successfully it will be there so the investment can really can enter it if possible.  It'd be difficult, but it may be done.

Last of all, what I'm trying to say the latest one was taking over 144-square foot building to handle alloys.  And we're not talking about little things, we're talking about very expensive alloys of the aircraft and many other deals.  In this building, we're doing some new operations which will be our growth pattern for this coming year.

In this building, what is very odd, we have the opportunity to do some state-of-the-art operations in what we call "blending."  But we can also be able to blend high alloys.

Someday, if any of you are (inaudible) near in Louisville, I couldn't invite you to the Kentucky Derby because it didn't have enough seats.  But it's interesting and I only hope that sometime you want to visit.  I will really like to open it up to Q&A because I think that would be more important than my just talking and we can answer things that may come up as we answer these questions.

Ladies and gentlemen, as a reminder in order to ask a question, please press star then the number one on your telephone keypad.  If your question has already been answered, you may withdraw yourself by pressing the pound key.  Again, press star one for any audio questions.

Your first question comes from the line of Rudy Scarito with RS Finance & Consulting.

Rudy Scarito: Hello, everyone.  Just have two questions and they relate to something that Don Rodgers had mentioned.  One is you mentioned you've been spending on your – on adding some staff to make sure that it's sufficient to accommodate this level of sales.  Do you anticipate adding anymore or is the current staff sufficient to operate at these levels?

Don Rodgers: The current staff is sufficient to operate at these levels.  I mean, you know, Harry or Brian might want to talk about that hiring of Terry Hancock.  You know, if there's a specialty person out there, we might hire someone.  But to the level that we have, we have the adequate staff.

Rudy Scarito: OK, and then the other part of my question relates to capital spending.  It's only, I guess in this year, you mentioned a little bit more than two million.  Is that maintenance CapEx or is there new – are you undertaking new projects?

Harry Kletter: No, this is addition to some other parts of the operation that will bring in more income and more grading out of our shredder.  The shredder operation is very important.  It's what you get out of the material you shred.  Automobiles have many items in them and your material that we process through it.

So what that will entitle us to get more copper, more (zinc) and very, very little going to the landfills.  It's just an upgrade, but it's a successful upgrade because it will increase the profit on what you're already doing.

Rudy Scarito: OK, great.  Thank you.

Operator: Your next question comes from the line of Juan Noble with Taglich Brothers.

Juan Noble: Hi, good afternoon.  Congratulations on the quarter.  Just a couple of questions on the items that Don went over.  I mean, you gave percentage increases for the volume of certain categories of metal.  But just for the sake of granularity, Don, could you give us some sense as to, you know, the basic number of tons?  How many tons are we talking about here for each?

Don Rodgers: Hold on a second, tons in terms of what's coming out of the shredder and what's coming out of the steel mills?

Juan Noble: The tons that were processed or sold there in the first quarter.

Don Rodgers: OK, the stainless we sold around 25,000.

Juan Noble: OK.

Don Rodgers: And the ferrous is a little over 30,000.

Juan Noble: OK.

Don Rodgers:  And non-ferrous was a little over 5 million pounds.

Juan Noble: Five million pounds, OK.  That's very helpful, Don.  My next question was when you were giving out the breakdown of dollar contributions to sales, you attributed 8.6 million to the shredder.  Now, Harry just mentioned, you know, different types of metals, copper, et cetera, that are extracted as a result of others being processed by the shredder.  Is that what that 8.6 million consists of?

Harry Kletter: The 8.6 million is all total.

Don Rodgers: Yes, combination of both the ...

Harry Kletter: It'd be the shredder and the (inaudible).

Juan Noble: OK, all right.  Great, thanks very much.

Operator: Again, if you would like to ask an audio question, press star then the number one on your telephone keypad.

Your next question comes from the line of Eric Glover with Canaccord.

Eric Glover: Hi, good afternoon guys and congratulations.  My question is I was just wondering what you're seeing in terms of your customers.  Are they beginning to build inventory now or are they simply buying for what they need to maintain current production.  And then my second question is are you taking advantage of the downturn in prices to build your own inventory?  Thanks.

Harry Kletter: Really, we sold everything for May.  We have very good sales for May in all items.  We're still allowed for May of all the material with oneself.  We're very surprised because we sold some of our material pre the selling period and came up very well.  And then we came back afterwards, we had good sales and the downward pressure did not come about as much as people thought.

We're very comfortable with our present price that we have.  It's also allowed for the month of May, and we're getting now ready and have our pre-early orders for the stainless operation, which we usually get longer upfront sales but we know what month to ship it in.

But we're very surprised because number one, scrap is coming in real serious.  It has stopped again, and this is the thing that everybody has to do.  How do you keep the flow coming because for awhile, if everybody's too clean up, everything that was (lame), now we're back to the same quagmire that was here before.

There may not be enough scrap for the winter and into the summer of all grades, except of course your non-ferrous is a little different.  But the ferrous and the alloys and the stainless will be in short supply in my thinking.

Eric Glover: Thank you very much.

Operator: Again, if you would like to ask a question, press star then the number one on your telephone keypad

You have a follow-up question from the line of Juan Noble with Taglich Brothers.

Juan Noble: Hi, a couple of things, Harry.  On your last remark, you mentioned a shortage of steels here to fill your inventory.  Now, how does that affect your outlook for your revenue going forward?

Harry Kletter: Good, we already had the right pricing, the right price and we have always ensured our future sale for the next 30 to 60 days.  The thing is what you have to think about is, especially in the ferrous, is how to look as far out as the next (stall).  For some reason, we got so busy and we got so many new customers upon our operation growing, we developed a whole new venue to our cash – our flow stream.

I am surprised as I've been in this area for a long time, but everybody seems to like us.  And they have flown in and sometimes there's high as 30 to 40 trucks waiting in the morning to bring material to us.  So we're not going to be short, other people could be short, not mine.

Juan Noble: OK, great.  Another question for a follow-up question for Don.  Your 10-Q says that your prices on average for the quarter were up 60 something percent.  Now was it 63-percent increase all across-the-board or were price increases sharper for some categories of product than others?

Don Rodgers: Yes, they vary by category.

Juan Noble: All right.  Could you give me a range, Don, just give me some color on that?

Don Rodgers: The ferrous prices were up about 30 percent, maybe stainless was up about 10, non-ferrous up about 15.

Juan Noble: OK, all right.  Great, thanks very much again.

Operator: Your next question comes from the line of (Paul Duby) a Private Investor.

Paul Duby: Hi, my name is (Paul Duby).  Congratulations on your good earnings report.  I was just wondering – looking at your revenue from Sarvis, why did it decrease from 2009 to 2010?

Harry Kletter: Well, the (inaudible) business has become a very, very competitive business and it has reached the point of PRP’s which is bidding process, plus the closing of businesses.  It is not really a business for the future in my eyes.  As we've seen many of the operations going bankrupt, their closing down, as good as it is.

There is a lot more things that are going on within them, but it doesn't benefit us to stay that heavy.  You sometimes say, "Why would you want to retreat of the business that you have because there's better businesses than our facilities than handling the small margin of the waste business."

I've been in both businesses throughout my career which is a long career.  And I don't see handling waste paper as opposed to the very serious items that we're handling right now.

Paul Duby: OK, now I understand.  Thank you very much.  I feel more comfortable now.  Thank you.

Harry Kletter: OK.

Operator: Sir there are no further audio questions at this time.

Harry Kletter: All right, I'm going to wind up and just tell you this that, you know, this business has to become an investment community business.  Raising capital, looking at the return on investment, and being on kind of a business – we understand, we are unlucky in the face.

There is not too many of the businesses within the structure of this industry.  That's why lot of times I just talk about industry because I want to see it grow because we cannot be alone in any industry.

And that's about where I am today and our people and I want to thank all my employees and everybody else for giving the results that they have.

Operator: This concludes today's conference call.  You may disconnect your lines at this time.

Forbes 100 Best 2010 & 2011

Forbes100best

Forbes100best


Contact

Industrial Services of America Inc.
7100 Grade Lane
Louisville, KY 40213

502.367.7100
1.800.824.2144
info@isa-inc.com